Exclusive – potential £300M hole in MOD budget as Cabinet Office fails to deliver guarantee on savings

You may remember (he said optimistically) that Philip Hammond, the UK’s Minister for Defence, made a video back in June last year.

Talking about MOD’s financial position, he made this interesting and surprising comment :

Another £300 million will come from an innovative deal with the Cabinet Office Efficiency and Reform Group and the Government Procurement Service who will take over responsibility for some of our commodity and IT procurement and in conjunction with the Treasury guarantee the agreed level of savings”.

We found this fascinating, as in my 20 years of following government procurement, I have never seen Treasury ‘underwriting’ savings like this or an agreement between departments of this nature.

But then, it all went quiet. So in December, we put in a Freedom of Information request. And here is the relevant answer in full. Thanks to MOD, who are far more helpful than others (like the Cabinet Office)in answering such questions.

“ We are developing a Service Level Agreement with the Cabinet Office which will set out the respective responsibilities of the Crown Commercial Service (CCS) and the MOD across of a range of services. These services will include the provision of a managed service for Common Goods and Services (CGS). The MOD along with the Department for Transport, Department for Works and Pensions and Department for Communities and Local Government is one of four ‘trailblazing’ departments, which are currently undertaking a detailed assessment of CGS spend, and developing a detailed plan for transferring categories of spend to CCS from 2014 to 2016.

The detailed arrangements for how savings are delivered, measured and validated are still being finalised. Government Procurement Service will be part of the new trading fund for CCS. GPS already provide procurement services to the MOD for CGS valued at £1.4 billion in 2012/13. The MOD will pay suppliers directly for the goods and services purchased through CCS”.

So what can we learn from this?

The Cabinet Office centralisation programme is going far, far slower than was planned or desired is the secondary but important point to note. 2016? This was supposed to be done by the end of 2013, which maybe suggests  Cabinet Office under-estimated the complexity of this or their capability to take on the work.

Then we have this £300 million ‘guaranteed’ savings. It may still be that an agreement will be reached, but given some seven months have gone by, it looks more likely that it won’t.

That isn’t too much of a shock – as I say, it was a very surprising announcement. I just don’t see a mechanism to underwrite the savings. The entire Efficiency and Reform group in Cabinet Office, of which GPS / CCS is part, ‘only’ has a total budget of £100 million, so they can’t cover the shortfall if CCS fails to make the savings. And where would Treasury get the money from to subsidise MOD if CCS and Cabinet Office can’t deliver? It might also set a dangerous precedent.

Putting the clues together, our interpretation of what happened is this. Cabinet Office offered MOD a ‘guaranteed’ saving as a sweetener to persuade them to agree to the transfer of the ‘common categories’. Fine, said MOD, but you or Treasury will need to underwrite that saving, so we can bake it into our budgets.

Yes, we can do that, said someone from Cabinet Office.

Hammond then gets briefed by his officials, and makes his speech. Cabinet Office go to talk to Treasury, who aren’t quite as keen as Cabinet Office hoped.  “What do you mean, underwrite the savings”, we might imagine Treasury saying. “Are you mad”?

Hence no agreement, Hammond left in a difficult position, Treasury assert their authority over Cabinet Office, and we have a potential £300M hole in someone’s budget.  

We might also ask where the £300 million came from in the first place? Knowing how these things  usually happen, I can imagine Cabinet Office, or their consultants, saying, “well, I’m sure we can save 5% from these categories”, which probably equates to approximately the sum in dispute.  That would be said  perhaps without really understanding the detail.

So, for example, MOD have a large spend on fuel oil, for obvious reasons. We’d suggest saving 5% on that category depends to a very small degree on the capability of the procurement effort, and to a much larger extent on global oil prices and currency rates. Now if the oil price drops, maybe Cabinet Office will get lucky. But if it rises..!

Anyway, the end result is that the £300 million savings aren’t guaranteed, not yet at least, and I suspect MOD will want any future commitments from Cabinet Office signed in the blood of a suitably senior official.

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